10-K
Analysis:
AAR
CORP.
10-K ANALYSIS: AAR CORP.
I.
Introduction
AAR CORP, formerly Allen Aircraft Radio Corporation, become a public company since 1967.
Today the company leads by David P. Storch which started his leadership as Chief Executive Officer in
1996. Company with headquarter at Wood Dale; Illinois prepares its annual financial report which
ended every 31 May, and the latest 10K report provided by company was ended at 31 May 2012. Audit
process of its financial statement has completed by KPMG with unqualified opinion. Consolidated
financial statement which consists of consolidated balance sheets, statement of incomes, change in
equity, and cash flows has been audited in accordance with the standards of the Public Company
Oversight Board, and the opinion shown that all financial statement items present fairly, in all material
respects, in conformity with U.FS. Generally Accepted Accounting Principles. Current stock price of
AAR Corp is $13.56 (as November 16, 2012) with dividends per share $120.8 (as May 31, 2012).
AAR CORP is international aerospace services provider. Its business divided into four segments,
which are: (1) Aviation Supply Chain, (2) Government and Defense Services, (3) Maintenance, Repair
and Overhaul, (4) Structures and Systems. The products and services that they provide in Aviation
Supply Chain are related with supply chain solutions, aircraft and engine parts supply, component
repair, aircraft and engine sales and leasing. The Government and Defense Services include a variety
of special service that helps the government for its vital defense and humanitarian acts. While in
Maintenance, Repair, and Overhaul division, AAR supports maintenance and structural repairs to
aircraft, landing gear, engineering, and technical service. The last division is Structure and Systems
which support Aviation Supply chain, and emphasize on design and manufacture for cargo system and
aircraft’s interior.
Main geographic area of activity the company is in United States. In fact, U.S. Department of
Defense and its contractor U.S. Department of State are some of principal customers in Government
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and Defense Services. Other main customer is foreign military organization or governments.
Department of Defense and its contractor also company’s main customers in Structures and System
segment.
II.
Industry situation and company plans
A. Management Letter
The Independent Auditor conduct audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that reveal material weakness, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. The
auditor’s opinion is that the Company maintained effective internal control over financial reporting as
of May 31, 2012 in all material respects, based on criteria established issued by COSO (Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Tread way
Commission). The independent auditor conducted its audit of internal control over financial reporting
of the Company excluded an evaluation of the internal control over financial reporting of Airinmar,
Telair and Nordisk.
1. The scope of managements’ assessment of the effectiveness of internal control over financial
reporting as of May 31, 2012 includes all of the Company’s business units except for Telair
International Gmbh (‘‘Telair’’) and Nordisk Aviation Products, AS (‘‘Nordisk’’), which were
acquired by the Company on December 2, 2011, and Airinmar Holdings Limited (‘‘Airinmar’’),
which was acquired by the Company on October 11, 2011.
2. Consolidated amount of sales for the year-ended May 31, 2012 were $2,064,998, of which
Telair, Nordisk and Airinmar represented $93,880, $25,549 and $26,058, respectively.
3. Consolidated assets as of May 31, 2012 were $2,195,653, of which Telair, Nordisk and
Airinmar represented $287,587, $53,570 and $46,486, respectively.
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4. The independent auditor conducted its audit of internal control over financial reporting of the
Company excluded an evaluation of the internal control over financial reporting of Airinmar,
Telair and Nordisk.
B. Review Company’s Products and Services
i.
Aviation Supply Chain
In 2012, this segment contributed 28% of sales. Since 2008, company’s strategy has been to
gradually reduce our investment in our joint venture and wholly-owned aircraft portfolio available for
lease or sale to the commercial airline market. At May 31, 2012, the total number of aircraft held in
joint ventures was 18 and two were wholly-owned. Acquisition of Airinmar is to support this segment.
ii.
Government & Defense
In 2012, this segment contributed 27% of sales. Acquisition of Airlift, formerly known as
Aviation Worldwide Services, in April 2010 is a part of strategy in this segment especially to support
the U.S. Department of Defense and performs engineering and design modifications on rotary-wing
aircraft for government customers.
iii.
Maintenance, Repair & Overhaul (MRO)
AAR was voted Best MRO in-the Americas by industry professionals in Aircraft Technology
Engineering & Maintenance magazine’s annual awards program. It is show how position of AAR in
these region. In 2012, sales in this segment were 21% of total sales.
iv.
Structures & Systems
Sales in this segment were 24% of total sales in 2012. The acquisition of Telair and Nordisk is
to strengthen this segment and provide worldwide services in Germany, Sweden and Singapore
(Telair) and Norway and China (Nordisk).
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v.
Customers
The principal AAR’s customers in the Aviation Supply Chain and Maintenance, Repair and
Overhaul segments are commercial airlines, regional and commuter airlines, aviation operators,
domestic and foreign military organizations. In the Government and Defense Services and Structures
and System segment, principal customers are the U.S. Department of Defense and its contractors, the
U.S. Department of State, and foreign military organizations or governments. Here is the detail
information of AAR customers.

Large commercial airlines: Air Atlanta Icelandic, Air France/KLM, Alaska Airlines, Alitalia, American
Airlines, Continental Airlines, Delta Air Lines, Japan Airlines, Korean Airlines, Lufthansa, Northwest
Airlines, Southwest Airlines and United Airlines.

Regional airlines: Air Nostrum, Brit Air, Chautauqua Airlines, KLM (UK), Mesa Air Group and
Régional.

Cargo carriers: Airborne Express, DHL, FedEx and UPS.

Manufacturers & Maintenance Providers: Airbus, Boeing, Bombardier, Cessna, Chromalloy Gas
Turbine Corporation, General Electric, Gulfstream, IAI, L-3 Communications, Lockheed Martin,
MTU Maintenance, Northrop Grumman, Pratt & Whitney, Rolls-Royce, Safran, and Unison.

Governments: Israel, Japan, the Netherlands, Singapore, Thailand, Turkey, United Arab Emirates,
United Kingdom and the United States.
vi.
Competition
Among its competitors, AAR is very limited with financial abilities. AAR maintains satisfactory
competitive position through responsiveness, our attention to quality and technical and financial
capabilities as key to compete with the competitors. In both the Aviation Supply Chain and the MRO
segments, AAR competes with OEMs, the service divisions of large commercial airlines and other
independent suppliers of parts and repairs and overhaul services. While Structures and Systems
segment compete with a number of divisions of large corporations and other large and small
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companies. For Government and Defense Services segment, company competes with a few domestic
government contracting companies and large domestic companies and other independent suppliers
of these types of services.
C. Industry Situation and Its Outlook
AAR CORP is running on aerospace support business, for both government and commercial
area within four business line. Company has done great job for its portfolio by balancing of sales each
segments. Looking forward, AAR has opportunities and threats resulted from the aerospace industry.
For commercial line, AAR sells or lease aircraft, new or modified. This business has high risk
because the aircraft is produced by Boeing or Airbus, not by their selves. They are not the key maker
in the industry. When Airbus or Boeing launch new technology or stop produces specific models, it
could be harm their business because AAR has to catch up the knowledge to adapt new industry. In
addition, climate change trend could be impact to aviation business because of pollution issue.
The positive development of commercial airline such as growing of fast budget airlines could
have positive impact for company business. AAR should aware when the airlines create cooperation
and develop network including for maintenance and overhauled facilities.
To anticipate these condition, company aggressively expand the business with acquisition
program, for instant Telair and Nordisk, which have facilities in Germany, Sweden, Singapore and
Norway, China respectively. The acquisitions are also important to attract current customers and new
customers because of the global distribution of company. The company also stop operate unprofitable
facilities such as in Amsterdam.
Since 2008, the company changes strategy to reduce the number of aircraft for sale and lease
to commercial airline, both joint venture or wholly owned. The company also approaches Boeing to
provide support service to their products, and AAR has selected as provider cargo handling systems
for New Airbus A400M military transport aircraft.
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In other sector, Government customer also shows some threats. Department of Defense
United Stated will reduce the budget regarding to enactment of Budget Control Act by Congress which
reduced defence spending $487 billion over 10 years since 2012. Another problem from this segment is
short term contract, usually one year or less with option to extent one or two times. Moreover, United
States’ military withdrawal from Afghanistan in the end of 2014 will affect to AAR revenue.
Company has already predicted the decreasing of sales from this segment, and will maintain
existing and expand new customers to avoid worsening of financial condition, for instant, recently AAR
announce their 3 years extension of contract as support service in Afghanistan from Department of
Defense worth $161M and AAR has chosen as Boeing 737-400 modifier by Colombia’s Air Force, worth
$31M.
Figure. AAR’s succeed to extent their service in Afghanistan in Nov 2012. Source:
http://www.defenseindustrydaily.com/Allies-Absent-in-Afghanistan-Helicopters-Hired-05366/#fleet-rental-charter
III.
Financial Statements
A. Income Statement
The company provides its Statement of Income in Multiple-Step form, because it is segregate
the operating revenues and operating expenses from non-operating revenues, non-operating
expenses, gains, and losses. Comparing to 2011, the income statement of 2012 decrease about 3
million or 3%, due to asset sold in fourth quarter to Maintenance, Repair, and Overhaul division for
6000. Another factor is because of there is additional Inclusion Selling General and Administrative
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expense during 2012. However, if we look deeper into its Net Sales, the company made a tremendous
increase on this accounts for about 14.4% and reach $2.1 billion, which is the highest net sales that
they ever made in the history. This high performance primarily resulted from acquisition of the three
companies; Airinmar, Telair, and Nordisk that astute a big sales portion for AAR.
B. Cash Flow Statement
From the cash flow we can found that in general, the net cash and cash equivalent of 2012 is
increase that previous year about 17% or around $10 million, but the most increasing came from
investing and financing activities that recorded 300% and 2600% of changes. On the other hand, cash
flow that generated from operating activities of 2012 lower than 2011, about $14 million. This is
actually not favorable financial condition, but if we observe more we will notice that this trends
causing by huge cash outlay from operating activities due to acquisition of three companies mentioned
earlier. Automatically this make the company have to accumulate depreciation expense, cost of
equipment, accrued liabilities, and some cost of inventory. So, in 2012 fiscal year the company
expanding through its investing and financing activities, and we predict that AAR will made an increase
in cash flow from operating when they are already stable to manage its new subsidiaries.
The biggest source of company’s financing activities is borrowing items that provide $306,843
cash resulted from $410,246 partially offset by the dividends cash payment of $12,081. Beside that
the company also made offering completion with Development Bank of Japan Inc. for $175,000 in
7.25% Senior Notes in a private placement that entered five year full amortization term loan
agreement.
C. Balance Sheet
The Current Assets account 2012 is increasing comparing previous year, especially cash,
account receivables, and inventories are made bigger portion of increase, while land and equipment
for non-current assets also placed in the second highest improvement. As a result form acquisition of
the three companies, AAR Corp also recorded 130% increment of goodwill and other intangible assets.
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On liabilities and equity side, current maturities of long-term debt highly increase by 970%
from the previous year along with total accrued liabilities that increasing about 27% or about $32
million. But the total of current liabilities is still less than 50% comparing with its total of current assets;
it means the company has a in well- managed liquidity. The composition of equity relatively has no
significant changes during two fiscal years. Cash dividends arise about 300.4% from previous year, and
the company made additional repurchase of shares about 40% in 2012. This means that the company
wants to give more benefit to its shareholders.
D. Accounting Policies
i.
Revenue Recognition
Sales and its related cost are recognized based on shipment of product to the customer. Sales
of certain defense are recognized upon customer acceptance under the company’s expeditionary
airlift services contracts, and paid and record as revenue based on amount which is based on number
of hours flown. Sales from services and its related cost are recognized when customer owned material
is shipped back to the customer after the service’s completion. For Lease that covered variable rents,
AAR recognizes the income on straight-line basis.
ii.
Inventories
Lower of cost or market method (estimated net realizable value) is used on inventories
valuation. Cost is determined by the specific identification, average cost, or first-in first-out (FIFO)
methods. Provisions are made for excess and obsolete inventories and inventories that have been
impaired as a result of industry conditions.
iii.
Property, Plant and Equipment
Depreciation is computed on the straight-line method over useful lives of 10-40 years for
buildings and improvements and 3-10 years for equipment, furniture and fixtures and capitalized
software. Aircraft and major components in service to support AAR Airlift business are depreciated
over their estimated useful lives which is generally 7-20 years. Leasehold improvements are amortized
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over the shorter of the estimated useful life or the term of the applicable lease. Repair and
maintenance expenditures are expensed as incurred.
iv.
Account receivables and Allowances for doubtful accounts
Allowance for doubtful accounts is intended to reduce the value of customer’s accounts
receivable to amounts expected to be collected by the company. The company considers several
factors such as general and industry-specific economic conditions, customer credit record, and
customer’s present and expected future financial act.
v.
Pension Plans
The liabilities and net periodic cost of pension plans are determined utilizing several actuarial
assumptions, the most significant of which are the discount rate and the expected long-term rate of
return on plan assets.
The discount rate is determined based on a review of long-term, high quality corporate bonds
as of May 31, 2012, and models that match proposed profit payments to coupons and maturities from
the high quality bonds.
IV.
Financial Analysis & Ratio
A. Financial Analysis
From the entire indicator, the AAR is in negative trends and trying to solve the problem by
expanding the business with acquisition using long term loan. Company also try to create better
performance which is indicated by increasing in liquidity ratio and operating management (cash cycle)
ratio. The company’s effort is not strong enough to improve the performance, it shown from the
declining of return on assets, cash flow yield, cash return on sales and cash return on assets. Be noted
that the acquisition was done in end of second semester, when the operation is fully done in one year;
it could be boosting the sales and also cash flow from operating.
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Comparison key ratios of AAR with Aerospace/Defense Products & Services Industry
Description
Industry Average
AAR
Analysis
Price per earning per share
14.5
8.07
Lower, bad
Return on Equity
0.24
0.08
Lower, bad
Dividend yield
0.025
0.02
Almost same
Profit margin
6.8
0.03
Lower, bad
However, return on equity is decreasing, which usually is increasing when the debt is used for
expanding. The company succeed in expanding the company business and increases the sales. AAR
should also create more efficient operation to improve the profit margin, at least same with industry
average (see table), and cash flow yield to catch up with other competitors in this industry. Here is the
detail each ratio.
B. Ratio
In term of financial analysis, first focus on liquidity ratios in 2011 and 2012. As seen in the
graph, current ratios are very high, more than 2, and it increasing. It means company has current asset
higher, more than two times of its liabilities. In fact, their working capital is more than 500 million. We
deeply analysis again with quick ratio, it drop to less than 1. It means most of company asset is not
that so liquid, or not in cash form, mostly in inventories.
The inventories turnover 4.58 and 4.78, which means in one year, the company sell inventory
more than 4 times, or it needs 79.66 and 77.74 days in 2011 and 2012 respectively. It is increasing
which is having better performance. Receivable turnover is increasing from 6.86 to 7.01 or the
company will collect from previously 53.17 days become 52.10 days which 1 day faster. Total operating
cycle is decreasing from 132.83 days to 129.83 days. Both indicators show increasing or better
performance, but the payable turnover decreasing from 7.07 times become 6.76 in one year or
company can pay their account payable for 51.64 days to 53.99 days, which is not good. Maximum of
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its liabilities (financing period) will be due in 2026. Overall in term of liquidity, company is showing
better performance, only the days to completed the payable is increasing (see excel file).
In term of profitability and total assets management financial ratios, three ratios are showing
declining trend which is showing declining performance. Profit margin from 0.04 declining to 0.03,
cash assets turnover is declining from 1.06 to 0.94 and return on assets is decreasing from 0.08 to 0.07.
Similar with profitability, liquidity financial indicators also show worse performance even in small
number. Cash flow yield from 1.56 moves to 1.39, cash return on sales also shift down from 0.06 to
0.05. While the return on assets decline from 0.08 to 0.07.
For liquidity financial ratios, all parts are decreasing which showing bad enactment. First is
cash flow yield going down from 1.56 to 1.39, and then cash return on sales decreasing from 0.06 to
0.05. Last is cash return on assets is shifting from 0.05 to 0.04. Free cash flow increases from
$224.350.000 to $473.361.000 which is showing that company reduce their investment from
operating cash flow.
Financial risk ratios also showing bad performance with the indicators from debt equity ratio
is increasing almost two times from 0.54 to 0.99. It means the company debt is almost same with the
equity from previously only half. Return on equity is decreasing from 0.09 to 0.08 and interest
coverage is declining from 4.36 to 3.46.
Operating assets management (cash cycle) ratios are showing better performance with the
indicator was explained in liquidity ratios.
C. Market Indicator Financial Ratios
With all ratios mentioned above company has achieved price per earning per share 8.07 and
dividend yield with 890.93. Compare with the average of aerospace/defence products and service,
AAR performance is below the average.
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V.
Articles (separated sheet) and Bibliography
1. Gino Vicci, March 14, 2012, Outlook for AAR Corp.'s government business bearish,
http://news.medill.northwestern.edu/chicago/news.aspx?id=203481
2. Lee Samaha, September 25, 2012, Where is the Aerospace Industry Headed?,
http://beta.fool.com/saintgermain/2012/09/25/where-aerospace-industry-headed/12750/
3. Defense Industry Daily, November 5, 2012, Allies Absent in Afghanistan - Helicopters Hired,
http://www.defenseindustrydaily.com/Allies-Absent-in-Afghanistan-Helicopters-Hired05366/#fleet-rental-charter
4. Zacks Equity Research, November 7, 2012, AAR Corp's Airlift Service Renewed,
http://finance.yahoo.com/news/aar-corps-airlift-renewed-214913519.html
5. PRNewsire, November 8, 2012, AAR Sources and Modifies 737-400s for Colombian Air Force,
http://finance.yahoo.com/news/aar-sources-modifies-737-400s-111700923.html
6. http://biz.yahoo.com/p/611mktd.html
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VI.
Exhibit 1 (Calculation and complete version on excel)
No
1
2
3
4
5
6
7
Ratios
2012
2011
Liquidity Ratios
Working capital
590,046.00
497,975.00
Current ratio
2.25
2.20
Quick ratio
0.78
0.83
Receivable turnover
7.01
6.86
Days sales uncollected
52.10
53.17
Inventory turnover
4.70
4.58
Days inventory on hand
77.74
79.66
Payables turnover
6.76
7.07
Days payable
53.99
51.64
Operating cycle
129.83
132.83
Financing period
max is 2026
Profitability and total assets management financial ratios
Profit margin
0.03
0.04
Asset turnover
0.94
1.06
Return on assets
0.07
0.08
Liquidity financial ratios
Cash flow yield
1.39
1.56
Cash return on sales
0.05
0.06
Cash return on assets
0.04
0.06
Free cash flow
472,361.00
224,350.00
Financial risk ratios
Debt to equity ratio
0.99
0.54
Return on equity ratio
0.08
0.09
Interest coverage
3.46
4.36
Operating assets managements (cash cycle) financial ratios
Receivables turnover
7.01
6.86
Days sales uncollected
52.10
53.17
Inventory turnover
4.70
4.58
Days inventory on hand
77.74
79.66
Payables turnover
6.76
7.07
Days payable
53.99
51.64
Operating cycle
129.83
132.83
Financing period
max is 2026
Supplemental operating assets management financial ratios
Working capital
590,046.00 497,975.00
Current ratio
2.25
2.20
Market indicator financial ratios
Price/earnings per share
8.07 as Nov 16, 2012
Dividend yield
0.02 as Nov 16, 2012
Trend
Analysis
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Good
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Good
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